Bits and Pieces

On the rise of the James Tobin gang and the fall of the house of Milton Friedman, read here.
For more on James Tobin, I strongly recommend this by this other famous economist.

Many gems as always in Warren Buffet's highly entertaining and informative letter to shareholders:

"Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

"Local governments are going to face far tougher fiscal problems in the future than they have to date. The pension liabilities I talked about in last year’s report will be a huge contributor to these woes. Many cities and states were surely horrified when they inspected the status of their funding at yearend 2008. The gap between assets and a realistic actuarial valuation of present liabilities is simply staggering."

"If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians. [...] Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas."

"Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

"Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become important parts of financial statements though these items will not be validated for many years. Additionally, a frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with.
Sleeping around, to continue our metaphor, can actually be useful for large derivatives dealers because it assures them government aid if trouble hits. In other words, only companies having problems that can infect the entire neighborhood – I won’t mention names – are certain to become a concern of the state (an outcome, I’m sad to say, that is proper). From this irritating reality comes The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required."

And finally, a little bit of old-fashioned Barron's bashing!
The quotes above are indicative of not just folksy intelligence, as I hear people say about Warren Buffet, but of true genius. If you want to read something that is definitely not indicative of genius but rather of inflexible, ideological and misguided thinking, then try any article on the economy by Barron's in-house economist, Gene Epstein. In a letter I recently sent Barron's editor, I couldn't help being brutally honest:

"To the Editor. As a longtime faithful Barron's reader, I'm wondering how much longer I will be subjected to your in-house economist's never-failing wrong assessments of the state of the economy. Mr. Epstein has wildly, consistently and unapologetically underestimated this economic crisis since the beginning and, having been so wrong for so long, can hardly be expected to ever be right in the foreseeable future. He might be trying to emulate Mr. Abelson, who was bearish and wrong for the longest time until he became oh so right. However, Mr. Abelson never pretended to be an economist nor did he ever make, month in month out, numbered predictions that inevitably turned out to be far off the mark. Moreover, Mr. Abelson is a joy to read and does not respond shrilly to legitimate protest mail. Could you at least bring in some sort of assistant or associate economist who would give us a more realistic view of the economy, someone less ideological and more pragmatic. Best regards."